Japanese Yen: Energy shock drives weaker currency – MUFG

MUFG’s Lee Hardman highlights that rising Oil and natural gas prices are pressuring the Japanese Yen (JPY), with USD/JPY hitting fresh year-to-date highs above 163.00. The report notes that Japanese policymakers face a tougher backdrop as global yields rise, and that the Bank of Japan (BoJ) may hike rates as soon as September, though a single move may not reverse Yen weakness.

Energy shock and BoJ hike risks

"The low yielding currencies of the Swiss franc and yen have continued to underperform this month. It has resulted in USD/JPY rising to fresh year-to-date highs above the 163.00-level while EUR/CHF has risen back up to the 0.9300-level where it was last trading at the start of this year. The Swiss franc and yen have been two of the worst performing G10 currencies since the US-Iran conflict started in late February."

"The combination of rising energy prices and yields outside of Japan is creating a more challenging backdrop for Japanese policymakers by encouraging the yen to weaken further. Finance Minister Katayama has again attempted to dampen yen weakness overnight by repeating that they will take decisive action as needed but the comments have had limited impact on the yen as they did not mark a significant step up in the risk of imminent intervention."

"At the same time, Bloomberg reported yesterday that BoJ officials are open to raising rates at a faster pace than the consensus amongst economists, as the yen’s continued weakness adds to upside inflation risks according to people familiar with the matter."

"The Bloomberg report supports our forecast for the BoJ to hike rates as soon as in September. While rising yields in Japan would offer more support for the yen, we are not convinced another BoJ hike on its own will reverse the weakening trend. The yen would likely benefit more from an unwind of carry trades if global financial conditions were destabilized by the intensifying energy price shock putting pressure on major central banks like the Fed to deliver tighter policy."